ACCA Applied Knowledge · Business and Technology · Macroeconomic factors
A central bank wants to reduce inflationary pressure in the economy using monetary policy. Which action is most consistent with this aim?
Raising the base interest rate is the correct action. It makes borrowing more expensive and saving more rewarding, so spending and investment fall, reducing demand-pull inflation. The other options either stimulate demand or are fiscal policy measures rather than monetary policy.
- ARaising the base interest rateCorrect
- BLowering the base interest rate
- CIncreasing government spending on infrastructure
- DCutting the rate of income tax
Explanation
Raising the base rate makes borrowing dearer and saving more attractive, which reduces consumer spending and investment and so eases demand-pull inflation. Lowering the rate would do the opposite. Government spending and tax cuts are fiscal policy tools, not monetary policy, and would add to demand.
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